Skip to content

Understanding Crypto Currency and NFT & Related Taxability

Cryptocurrencies are a type of digital money. Bitcoin was the first cryptocurrency since their release in 2009, now there any different kinds of cryptocurrencies. It can be bought or sold with other currencies, used to purchase goods from sellers who are willing to accept cryptocurrencies as payment, make investments in many assets and are being retained as investments themselves.

What is Non-Fungible Token (NFT)?

NFT a.k.a. non-fungible token is a unit of data stored on a digital ledger (blockchain) which certifies a digital asset to be unique and thus not interchangeable. It is a proof of ownership which is separate from copyright, when a NFT representing an art is sold it does not mean the original owner cannot make another copy of the same.

In 2020, the Non-Fungible Token market has seen rapid growth recently with their value tripling to $250 million. NFTs are speedup a larger trend of digital economic innovation as the public is getting more interested and favoring crypto-economy too.

What is the technology that supports this?

Blockchain technology is the technology which allows cryptocurrencies and NFT to work. The blockchain is a database having evidence of transactions between different users. Edition and deletion is not allowed once a transaction has been recorded. That’s why it acts as a distributed digital ledger which is secure & usually anonymous.

What is legality of this type of transaction?

Aany transaction which involve cryptocurrency can be analyzed from 2 viewpoints which is income and expenditure. The transaction nature and parties to the transaction would decide if it may be taxable under the IT Act, 1961, or CGST Act, 2017, and other laws.

What is Taxability on View point of Income Tax?

The treatment of cryptocurrencies is governed by the IT Act in India. In the current legal landscape, there is no definite law regarding the taxation of cryptocurrency nor ant disclosure requirement about the income earned issued by the IT Department.

If cryptocurrency is considered as ‘currency’, it would not be susceptible to tax under the IT Act. The first reason being, under the Act, the definition of ‘income’ is an inclusive one, which comprises not only the ‘natural’ meaning but also the items mentioned Income Tax Act- section 2(24). But neither the natural meaning nor the income Tax Act- Section 2(24) includes ‘money’ or ‘currency’ as income, although it includes ‘monetary payment’. Second reason, being a mode of consideration, the tax incidence would be on the transaction and not on the currency.

If cryptocurrency is considered as goods or property, then clearly it would be either covered within the charging provision of ‘Profit and Gains from Business and Profession’ or ‘Income from Capital Gains’, depending upon its use for business or not.

Treatment under the head ‘Capital Gains’

The Income Tax Act- Section 2(14) defines a capital asset as “property of any kind held by the assessee whether or not connected with his/her business or profession”.  This definition of ‘capital asset’ provided is broaden in itself and covers all types of property except those expressly excluded under the Act. Thus, any gains arising out of the cryptocurrency’s transfer must be considered as capital gains, if they are held for investment.

Taxability under ‘Profit and Gains from Business & Profession’

The tax treatment of cryptocurrencies when held as ‘stock in trade’ is not the one which faces major difficulties as the issues arising while treating it as capital gains don’t arise when such cryptocurrencies are held in progress of business activity. The Income Tax Act- Section 2(13), the definition of ‘business’ is inclusive, and comprises of “trade, commerce or manufacture or any adventure or concern of this kind of nature.” Moreover, any continuous activity like trade in cryptocurrencies is included within this definition, and profits realized are taxable thereunder, chargeable under the Income Tax Act-section 28.

The profits may not compulsorily be in the money form, they are taxable even if they are ‘in-kind’. Any expenditure incurred for this purpose, such as the purchase of computing power as a capital asset, should be allowable as a deduction as per the provisions specified in Income Tax Act- Section 30 to Section 43D.

Taxability on viewpoint of GST?

The consideration of cryptocurrency as goods or property implies that the supply of bitcoins is count as ‘taxable supply’ and it is subject to GST. The supply of cryptocurrency as goods in exchange for other virtual goods or real goods should fall within ‘barter transaction’range since bartering is simply an exchange of one good for another good.

An approach where cryptocurrencies are considered as goods means that some transactions would be taxed twice – at first stage on supply & in the second stage on consideration, unnecessarily leading to higher tax. This higher incidence of taxation puts the businesses operating in cryptocurrencies at a big disadvantage which also curtail their purchasing capacity. In cases of international transactions the issue gets further complicated.

In India what is current clarity on this?

The CEIB (Central Economic Intelligence Bureau) proposed to impose GST at the rate of 18% on Bitcoin transactions recently. The Central Economic Intelligence Bureau told CBIC that Govt. could potentially gain INR 7200 crores annually on bitcoin trading. Central Economic Intelligence Bureau has suggested that Bitcoin can be categorized as an ‘intangible assets’ by which Goods and Service Tax could be imposed on all the transactions. Cryptocurrency could be treated as currents assets and on the margins GST be charged when traded – CEIB suggested.

Cryptocurrency `mining’ will be cosidered as a supply of service because it generates cryptocurrency and involves transaction fees & rewards. On transaction fees or reward the tax will be collected from the miner. If the value of the reward exceeds twenty lacs then the individual miners will require to register themselves under the GST.

Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 was supposed to be Budget Session of 2021-22 but it does not happen.

Conclusion

The crypto in today’s scenario has the potential to boost the backbone of digital infrastructure of India and also securing all the transactions made on the digital network. In this situation imposing taxes on the transactions involving cryptocurrency should be considered as a welcoming move and should not be seen as a restriction. It is also asserted that imposing tax on crypto as a policy matter can help to provide an ideal atmosphere to build the trust of the traders that their money is safe and the risks involved in trading are also reduced.

India should bring more clarity on cryptocurrenies like in Australia & UK, clear and progressive guidelines regarding this should be issued soon in India, so that India, becomes well-placed to ride the ‘cryptocurrency wave’ in the upcoming days.